Financial Daily from THE HINDU group of publications
Wednesday, Oct 08, 2003
Financial Daily from THE HINDU group of publications Wednesday, Oct 08, 2003 |
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Markets
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Derivatives Markets Columns - On the hedge BHEL outlook positive, buy Oct 420 calls B. Venkatesh
The following strategies are based on Tuesday's trading in the derivatives segment on the NSE: Equity options BHEL: The outlook on this stock is positive. The upside price target is Rs 450. The downside risk level is Rs 405. Consider buying the October 420 calls. Note that even the near-month options on this stock are not liquid at present. This is, perhaps, one reason the options are trading rich. The option greeks do not approximate the position risk because the trading horizon is close to the contract expiration date. If the stock rises to Rs 450 at the horizon, the October 420 calls will generate 88 per cent returns. If the stock declines to Rs 405, the position will tend towards zero. Note that the payoffs are based on the option cost of Rs 16 per option, against the current premium of Rs 19 per option. The projected returns based on the current premium will be 58 per cent. The trading horizon is 20 days. The market lot is 1,200. PNB: The outlook on this stock is negative. The downside price target is Rs 165. The upside risk level is Rs 215. The price projections are near symmetrical from the current price level. Note that the open interest position is approximately 80 per cent of the market-wide limit. This will lead to doubling of margins on futures and short option positions. Consider shorting the November futures. The contract is not very active, and trades at a relatively high basis. Based on the upside and downside price projections, the short futures position will be subject to 20-point risk. This risk cannot be immediately hedged because farther month option contracts are not traded yet. The position has to be initiated with strict stop-buy limits. If the stock declines to Rs 165 at the horizon, the short November futures will generate 30 points per unit (1,200 units per contract). If the stock rises to Rs 215, the position will lose 20 points per unit. The trading horizon is 24 days.
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